23 December 2015

The Merry Christmas Financial Update and other sick jokes #nlpoli

First, anyone who keeps talking about the two percent HST cut simply has no idea what the hell is going on in provincial finances.


Give it up.

You are only embarrassing yourself.

Second, absolutely no surprises in the latest update on provincial government spending. Well, no surprise for anyone who has been following SRBP faithfully.

For the rest of the folks out there,  the whole thing probably came as quite a shock.

This is the table from the financial update showing current projections for provincial budgets over the next six years.  The key assumption is that spending goes up about one percent every year.  On the revenue side,  the elves in the provincial finance department used current forecasts for oil prices.

The update notes that
Based on the current forecast, the combined impact of lower revenues and higher expenses will add over $10 billion to the deficit approximately during the 2016-17 to 2020-21 forecast.
No surprise whatsoever in any of that for regular readers.  The post on 15 December updated a budget assessment from the spring, using an assumed average price of US$50 a barrel for oil and two percent increases in both non-renewable revenues and total spending.

The result was an additional $16 billion in new debt between 2016 and 2023. Typical deficit every year was $2.0 billion  In other words, that is spot on what the finance elves produced.

Worst case scenario includes program cut

Third thing, note that the elvish projection for the worst case scenario shows government spending on services to the public goes down in the middle of this table and only increases by about $400 million over the six years of the official analysis.

What grows here is the public debt and the associated cost of paying the interest on that debt.
Debt is what’s important here.

Not net debt. It’s still a fallacy to talk about net debt like it was a real thing.


All that new debt – roughly double the current debt – would eat up more and more of our annual spending.  That’s precisely what your humble e-scribbler told you.

Our program spending on things like health care will have to climb to accommodate all those old people we will be getting.  What that finance department projection means in practical terms is that they are already anticipating spending a hell of a lot less on services to people that people like Kim Keating and the folks at the board of trade seem to think.   Kim told reporters on Tuesday that the government will have to chop into program spending to deal with this problem.  

Hebron, Muskrat Falls, and Old People

Basically, Kim hasn’t realized the half of it. Fourth thing, regular readers will note that SRBP warned as long ago as 2008 against the stupidity of government spending plans for offshore equity stakes and massive capital projects given the demographic projections we already had.at that point.
It’s too big a subject to tackle here but we are going to take a specific look at the financial implications of Muskrat Falls and offshore projects after Christmas.

For now, let’s just say for now that Dwight Ball’s unreserved endorsement of Ed Martin and Muskrat Falls makes absolutely no sense on any level in light of the province’s financial mess.

They still don’t get it

Fifth thing,  comments from Earle McCurdy and Keith Hutchings show they still don’t have a clue.

That 15 December post updated a projection from last spring that showed the government’s plan – using all it assumptions – was a pile of nonsense at the time all three political parties endorsed it.  The government would get out of deficit for a brief period and then plunge back in again.

That’s because the fundamental policy of the budget – spend all the money you can lay your hands on – was the major cause of the government’s problem.  The price of oil wasn’t the cause of the problem.
It’s amazing the number of people who blame the whole thing on the price of oil.  BMO’s official assessment included this line in the summary:  “The slide in oil prices has created a pretty grim fiscal situation in Newfoundland & Labrador, …”


Not true.

Never was.

Just goes to show, however, that until people understand the root causes of the current mess, the chance of getting out of the mess are slim.  Bank economists - indeed most economists - have been generally guilty of providing astonishingly superficial assessments of the provincial economy. That’s contributed to the general misunderstanding among politicians and the public that persists with Dwight Ball’s insistence that .“this problem is not going to be solved by cuts. We’re going to need to look at new sources of revenue.”

Until people realise how grave the problem is,  we won't stand a chance of trying to sort the mess out.